auditing

AUDITING

Presented By

V.Gopalakrishnan.,M.Com.,M.B.A.,M.Phil.,PGDMM.,

Assistant Professor,

Department of Commerce,

Kamaraj College, Tuticorin.

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

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Meaning - Auditing

• The Word Audit is derived from the Latin word “Audire” which means to hear.

• In Olden days, some experienced people ordinarily judges the accounts of business people for the purpose of the correctness of accounts.


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Meaning

The general meaning of an audit is a planned and documented activity performed by qualified personnel to determine by investigation, examination, or evaluation of objective evidence, the adequacy and compliance with established procedures, or applicable documents, and the effectiveness of implementation.


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Definition

Simple Definition:- Spicer & Pegler

“Audit is an examination of accounts & records which is carried out by vouching the evidences, supporting various transactions; by such an examination it is ascertained that the Balance Sheet gives a true & fair view of the state of affairs of business & the Profit & Loss Account gives a true & fair view of the profit or loss of business.


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Characteristics of Auditing

1. Systematic & Scientific Procedure

2. Essential Documents are integral part

3. It is done with the help of vouchers, documents, information and explanations received from the authorities.

4. Undertaken by an Independent person or Body

5. Analytical approach


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Cont.6. Art & Science Both

7. Verification of the results

8. The Auditor has to satisfy himself with the authenticity

9. Compliance

10. The auditor has to inspect, compare, check, review, scrutinize the vouchers supporting the transactions and examine correspondence, Memorandum of Association and Articles of association etc., in order to establish correctness of the books of accounts.


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Scope of AuditingThe scope of audit is increasing with the increase in the

complexities of the business. It is said that long range objectives of an audit should be to serve as a guide to the management future decisions.

Today most of the economic activities are largely conducted through public finance. The auditor has to see whether these larger funds are properly used. The scope of audit encompasses verification of accounts with a intention of giving opinion on its reliability. Hence it covers cost audit, management audit, social audit etc. It should be remembered that an auditor just expressed his opinion on the authenticity of the account. He has no power to take action against anybody, in this regard its said that “an auditor is a watch dog but not a blood hound”.


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Cont.1. Legal Requirements

2. Entity Aspects

3. Reliable Information

4. Proper Communication

5. Evaluation

6. Test

7. Comparison

8. Judgments

9. Work

10. Evidence

11. Misstatement


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Principles of AuditingFundamental principles of Auditing

1. Integrity, Objectivity and Independence

2. Confidentiality

3. Skill & Competence

4. Responsibility of work performed by others

5. Documentation

6. Planning

7. Audit Evidence

8. Accounting system & Internal Control

9. Audit Conclusions

10. Audit Report


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Detection & Prevention of Errors

• trasanction is to be left out to register, partial entry of one transactionError of Omission

• Rs. 1500 recorded as Rs. 5100Error of Commission

• ommission to post,posting wrong side & amount to an a/c, double posting,totalling mistake, balance b/d & c/f

Clerical Error

• fundamental principle of Accountancy & AuditingError of Principle

• two errors togather which will be resulted in trial balance sheet will agree

Compensating Error


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Detection & Prevention of Frauds

Misappropriation

Of Cash

Of Goods

By Employees

Manipulation of A/c

Showing more Profits

Showing less profit

By Top Management


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Advantages of Auditing

A. Businessman's point of view:-

1. Detection of errors and frauds

2 . Loan from banks

3. Proper valuation of investments

4 . Proper valuation of assets

5. Government acceptance

6. Suggestions for improvement

7. Better Reputation

8. Uniformity in accounts

B. Investor's point of view

1 . Protects interest

2. Moral check

3. Builds reputation

4. Good security


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Cont.C. Other Advantages

1. Audited account are detected as an authentic record of transaction.

2. Errors and frauds are detected and rectified.

3. It increases the morale of the staff and thus it prevents frauds and errors.

4. Because of his expertise the auditor may advise on various matters to his clients.

5. An auditor acts as a trustee of his shareholders. Hence he safeguards their financial interest.

6. For taxation purpose auditing of account is a must.


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Cont.7. In case of any claim is to be made from the insurance

company only audited account should be submitted.

8. Even in case of partnership firm auditing of accounts helps in the settlement of claim at the time of retirement/death of a partner.

9. Auditor account helps in managerial decisions.

10. They are useful to secure loan at the of amalgamation, absorption, reconstruction etc.

11. Auditing safeguards the interest of owners, creditors, investors, and workers.

12. It is useful to take certain financial decisions like issuing of shares, payment of dividend etc.


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Limitations of Auditing

Truly speaking, an audit should have no limitations of its own. It is designed to protect the interest of all parties who are interested in the affairs of the business. If there be any shortcoming arising there from, it may be due to its narrow scope of application in its related field of operation and unextended definition of the concept.

Auditing suffers from the following shortcomings:

1. Want of complete picture

The audit may not give complete picture. If the accounts are prepared with the intention to defraud others, auditor may not be able to detect them.


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Cont.2. Problems of dependence:

Sometimes the auditor has to depend on explanations, clarification and information from staff and the client. He may or may not get correct or complete information.

3. Post-mortem examination:

Auditing is a post-mortem examination. There is no use of such examination when events have already been occurred.

4. Existence of errors in the audited accounts:

It is not possible for the auditor in all cases, to check each and every transaction of an organization. As a result, there may be error in the audited accounts even after the checking by the auditor.


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Cont.5. Lack of expertise:

Auditor has to seek opinion of experts on certain matters on which he may not have experts knowledge. The auditor has to depend upon such reports which may not always be correct.

6. Diversified situations:

Auditing is considered to be a mechanical work. Auditors may not be in a position to frame audit programme, which can be followed in all situations.

7. Quality of the auditor:

Success of audit depends on the sincerity with which the auditor has performed his duties. The same audit work can be done by two different auditors with difference in sincerity.


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Differences Between Accounting & Auditing

Accounting Auditing

Meaning

It is the process of recording classifying and summarizing the business transactions to monetary Terms

It is the process of review of accounts to establish their reliability and the statements therefrom

Scope

It entails preparation of financial statements and their interpretation

Examination of accounts and records

Object

It investigates finding out the operating results and figuring out the financial status of an enterprise

The object is to judge the correctness and reliability of financial statement prepared by the internal staff of business enterprises

Hierarchy

Accounting Precedes the Auditing Auditing succeeds accounting


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Accounting Auditing

Qualification

No formal qualification is insisted for acting as an accountant

Auditor should be a qualified charted-accountant.

Expertise

Accountant is expected to be familiar with audit techniques and procedures.

Auditor is one who has the expertise to apply not only accounting principles but also auditing techniques and processes

Nature of Employment

Accountant is permanent staff of an enterprise.

He is an independent outsider. He is working on an assignment basis.

Remuneration

Accountant receives salary as per Remuneration of auditor is Pre-fixedThe terms of his service.


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FACTORS INVESTIGATION AUDITINGDescription Audit means the inspection,

examination or verification of a person, organization, system, process, enterprise, project or product.

Investigation means an inquiry, or is the act of detail examination of activities so as to achieve certain objectives.

Owners Audit is conducted on behalf of owners only and they make the appointment.

Investigation may be conducted either by owner of the undertaking or by an outsider.

Purpose To determine the true and fair view. Varies from business to business

Process Routine process Investigation is not a regular process

Scope It includes only an examination of the accounts of a business

It covers an examination of the accounts bur also covers an inquiry into other matter that are connected with the purpose for which it is undertaken

Period Year or six months May cover several years

Employees Does not examine personally May examine personally


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Audit Procedure

Audit Programme

Audit Note Book

Working Papers

Routing Checking

Test checking


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Audit Programme

• “An Audit programme is an outline of all procedures to be followed in order to arrive at an opinion concerning a clients financial statement.

• An audit programme is a written scheme prepared by the auditor to distribute the work to be followed during audit;

i. How much work is to be done?

ii. Who is going to do a particular portion of work?

iii. What is the duration of the time?


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Types of Audit Working Programme

Fixed Audit Programme Flexible Audit

Programme


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Specimen of Audit ProgrammeM/s.M.BalaMurugan Ltd.,

For the year ended on 31.3.2015Particulars of

WorkExtent of

Work to be Done

Actual Work Completed

Time Taken to Complete

Completed by (Signature)

A.Cash Book:

1. Posting2. Costing3. Vouching

1 month Full3 months

JuneFullJuly, November

B.Debtor’s Legder:1.Posting2. Costing3. Vouching

1 month1 month3 month

AprilMarchMay, October

Physical verification1. Cash2. Fixed assets3. Stock

As on 31.3.20As on 31.3.20As on 31.3.20

As on 31.3.20As on 31.3.20As on 31.3.20


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Audit Note Book

• During the course of an audit, the audit staff makes a note of the points that require clarification, explanation or investigation.

• Contents of the Audit Note Book; Technical Details about the Business Missing Vouchers Frauds and Errors found in the book Suggestions made by audit staff


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Audit Procedures

Adoption of Distinctive

Ticks

Routing Checking

Test Checking

Difference in Balance

Books


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I. Adoption of Distinctive Ticks

He should use different types of ticks for different purposes

He should issue clear instructions to the members

Tick should be small and clear

The kinds of ticks used by audit staff

The auditor should have the pencils and inks of different

colours of pencils every year


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Example of Tick


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Routine Checking

Routing checking is the checking of Common records and books or original entry and ledgers with a view of detect clerical errors and frauds of a very simple nature.

Advantages: Detection of errors and frauds Checking of postings Checking of final accounts Arithmetical accuracy of entries Simple Job


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Test Checking

• Test Checking is also known selective verification “Sampling Process” Test checking is a substitute for detailed checking.

• Advantages Saves Time and energy Useful & Purposive Easy for the auditer


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Various Techniques of Audit

• Routine checking• Test Checking• Vouching• Valuation• Physical examination• Confirmation• Inquiry• Confirmation• Examination of subsidiary Books• Analysis of Financial Statements


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Internal Check

• A System of Internal check is an arrangement of duties where by no one person is allowed to carry through and to record every aspect of a transaction.

• Objectives To allocate the duties & responsibilities of clerk To minimize the Errors & Frauds To detect error of fraud easily it is committed To prepare final a/c To exercise moral pressure over staff


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Internal Control


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Advantages – Disadvantages Internal Check

• Advantages Proper distribution of work Detection of errors and frauds Minimization of errors and frauds Increase the deficiency

Disadvantages No Seriousness Carelessness Expensive Disorder


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Vouching

• Vouching means checking of entries with the help of documentary evidences. For each entry it is to be ascertained which is properly authorised


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Precautions to be taken by the auditor while examining

vouchers

Each voucher should be consecutively numbered Voucher should be inspected and cancelled by the

auditor Voucher name should be correctly mentioned Auditor verify the voucher date and time Auditor verify the official seal & Authorized sign When voucher is missing, the auditor should satisfy

himself with regard to the reason of its being lost and demand for duplicate copy


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Verification - Meaning

• Verification means truth proving or confirming the Truth. Verification signifies “Proving the truth or Confirmation”.

• Verification includes the following, Existence Valuation Ownership Possession


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Valuation - Meaning

• Valuation of assets is an important part of their verification. Valuation means to test exact value of an asset on the basis of its Utility.


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Classification of Assets

• Fixed Assets – Plant & Machinery, Land, Buildings

• Current Assets – Stock in hand

• Wasting Assets – Coal, Mines

• Intangible assets – Goodwill, paten right, copyright

• Fictitious Assets - Shares


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Company Audit

• Company audit is conducted is accordance with the provisions of the Companies Act,1956.

• To Conduct a Company audit, a company must appoint qualified Auditor.


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Qualification of Auditor

• A person shall not be qualified for appointment as auditor unless he is Charted Accountant within the Meaning of CA Act, 1949

• A Person who holds restricted Auditors Certificate (Part –B) 1956

An Auditor must possess adequate educational qualification

He is independent of all influences

A Charted Accountant means a person who is a member of the Institute of Charted Accountants of India.


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QUALITIES OF AN AUDITOR

• Independence• Integrity• Objectivity• Ability for expression and communication• Tactfulness• Awareness


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RIGHTS & POWERS OF AN AUDITOR

Right of access at all times to books, accounts, and vouchers

of the company

Right to receive notice and to attend general meetings

Right to obtain information and explanations

Right to visit branches

Right to sign audit report

Right to receive remuneration


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DUTIES OF AN AUDITOR

1) Compliance with Audit Standard

2) Duty to Report Fraud

3) Duty not to render certain services

He can not render "consulting and specialized services" which means any one or combination of-

• Accounting and Book keeping services• Internal Audit• Design and implementation of any financial information system• actuarial services• investment advisory services• investment banking services• management services• any other kind of consultancy services


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4) Duty to sign audit reports etc.

5) Duty to attend General meeting

6) Duty to Report

Under section 143 of the Act the auditor has a duty to report to the members of the company on:

• accounts examined by him• every financial statement laid before a general meeting during his

tenure

7) Duty to Enquire-• Secures loans and advances• transactions represented merely by book entries• personal expenses• issue of shares for cash• loans and advances made by the company etc.

APPOINTMENT OF AN AUDITOR


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WHO CAN BECOME AN AUDITOR?

Chartered Accountant in practice

Partnership firm of CA’s in practice

Holder of a certificate in Part ‘B’ States


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DISQUALIFICATIONS OF AN AUDITOR

A body corporate An officer or employee of the company under audit A person who is a partner, or who is in the employment of

an officer or employee of the company A person who is indebted to the company for an amount

exceeding Rs.1000 A person holding security of that company A person who has been disqualified for appointment as an

auditor of a company on above mentioned grounds, shall also not be eligible for appointment with any other body corporate which may be that company’s subsidiary or that company’s holding company.


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WHO CAN APPOINT AN AUDITOR?

• Appointment by directors

• Appointment by shareholders

• Appointment by the Central Government

• Appointment by the Comptroller and Auditor General


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APPOINTMENT BY DIRECTORS

• FIRST AUDITORS :

The board of directors shall appoint the first auditor(s) of the company within One Month of the Date Of Registration of the company.

• CASUAL VACANCY:

The directors have been empowered to fill any casual vacancy in the office of an auditor, except which is caused by prior resignation of an auditor.


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APPOINTMENT BY SHAREHOLDERS

• FIRST AUDITORS :

In case the directors fail to appoint the first auditor(s), the shareholders shall do so at a general meeting by passing a resolution.

• SUBSEQUENT AUDITORS:

(i) By Ordinary Resolution

(ii) By Special Resolution

• CASUAL VACANCY:

If a casual vacancy in the office of an auditor arises by his resignation, such vacancy should only be filled by the company in a General Meeting.

The company shall within 7 days give intimation to the auditor so appointed. The auditor shall inform in writing to the Registrar of Companies within 30 days of his appointment.


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APPOINTMENT BY CENTRAL GOVERNMENT

If a company, at an annual general meeting, fails to appoint or re-appoint an auditor, the Central Government may appoint a person to fill the vacancy.

• The company has to give notice of the above fact to the Government within 7 days of the Annual General Meeting.

• The appointment by the Central Government is made from the panel of names suggested by the applicant company.


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APPOINTMENT BY THE COMPTROLLER AND AUDITOR

GENERAL

In case of Government Companies, the Comptroller and Auditor General appoints or re-appoints the auditor.


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The retiring auditor shall NOT be re-appointed in the following cases:

1. Not qualified

2. Unwilling

3. Passing of a special resolution

RE-APPOINTMENT OF AN AUDITOR


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4. Appointment of some other person

5. Unable to comply with the ceiling on no. of audits


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Ceiling on Number of Audits

Provisions of the Act

Objective of the ceiling

ComplianceCeiling in case of individuals

Ceiling in case of Partnership firm

REMUNERATION OF THE AUDITOR


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1. Fees to the Auditor2. Expenses3. Cost of any facility

provided to the auditor

CONSTITUENTS OF REMUNERATION


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• In case of first auditor appointed by the board of directors

Board of Directors

• In case of auditors appointed by the shareholders in the general meeting

Shareholders in the General

Meeting

• In case of auditors appointed by the CAG for government company

Shareholders in the General

Meeting

WHO CAN FIX REMUNERATION?

REMOVAL OF AUDITOR


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REMOVAL OF AUDITOR BEFORE THE EXPIRY OF HIS

TERM

Section 224(7)

The purpose of this section is to make the removal of an independent and conscientious auditor difficult.

• Removal of First Auditor• Removal of Subsequent Auditor


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APPOINTMENT OF AN AUDITOR IN

PLACE OF A RETIRING AUDITORSection 225

• SPECIAL NOTICE OF THE RESOLUTION: For appointing a person other than the retiring auditor, a special notice of such a resolution should be given to the company at least fourteen days before the meeting.

• RIGHT OF RETIRING AUDITOR TO MAKE REPRESENTATION: The retiring auditor has a right to make representations in writing to the company, not exceeding a reasonable length, and request for their notification to the members.


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• RIGHT TO GET REPRESENTATION CIRCULATED: The company, on receipt of the representation, shall mention the fact of the representation in the notice of the meeting and send a copy thereof to every member to whom the notice of the meeting is sent.

• GROUND FOR EXEMPTION: If the Central Government, on the application, is satisfied that the auditor is securing needless publicity of a defamatory matter, it can exempt the company from sending the copy of representations to the members.

• OTHER RIGHTS: Besides the rights mentioned, the retiring auditor also has a right to be heard at the meeting.

• PASSING OF RESOLUTION: The general meeting may by passing an ordinary resolution, remove such an auditor.


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PENALTY FOR NON-COMPLIANCE

According to section 232 of the Companies Act, 1956, if default is made by a company in complying with any of the provisions contained in section 225, the company and every officer of the company who is in default, shall be punishable with fine which may extend up to five thousand rupees.


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Audit Report

• A Report is a statement of collected and considered facts so drawn up as to give clear and concise information to persons who are not already in possession of the full facts.

• Kinds of Audit Report• Final Report• Interium Report• Partial Report


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Characteristics of a Good Audit Report

It should be unbiased

It should be expressed in clear

It should be accurate

It should be in simple style

It should be brief

It should be coherent


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auditing

Documents

management audit

word audit

misstatement v

social audit

cost audit

spicer pegler audit

accounts of business

verification of accounts